Take Exit VAT into account

While deregistration as a vendor for VAT purposes might seem like an attractive option under certain circumstances, the consequences of so-called Exit VAT must be taken into account.

In terms of the Value-Added Tax Act No 89 of 1991 (the VAT Act), every person who carries on an enterprise will be liable to register as a vendor for VAT purposes at the end of the month in which the total value of taxable supplies made, or are expected to be made, exceeds R1 million.

A person may also voluntarily register if he/she carries on an enterprise and the total value of taxable supplies will, or is likely to, exceed R50 000.

Registered vendors not only have to levy output tax on all taxable supplies, they have an additional compliance burden of filing VAT returns, usually every second month. Failing to do so will result in penalties and interest.

By not reaching the minimum threshold of R50 000, or ceasing to exceed the threshold of R1 million for compulsory registration, a person may voluntarily deregister as a vendor. This has several advantages, especially in cases where vendors have to levy output tax on all supplies but are not allowed to claim input tax on their purchases. Then, to add insult to injury, they also have to bear the associated compliance costs.

However, there is a catch when deregistering as a vendor for VAT purposes. Section 8(2) of the VAT Act determines that, subject to certain exclusions, a person who ceases to be a vendor will be deemed to have supplied any goods which formed part of his assets on the day before he is deregistered on which an input tax credit was allowed. This means that output tax will have to be calculated on all assets, and paid over to SARS. For example when a machine was purchased to make taxable supplies and on the day of deregistration the machine is still owned by the company, there will be a deemed sale on the machine and output tax will be charged on the sale amount and must be paid over SARS. When applying this to your entire organisation it may amount to a large expense, causing serious cash flow problems if the deregistration has not been properly planned.

Minor relief is granted in determining the value of the deemed supplies when deregistering. The value of the goods that are supplied will be determined in accordance with section 10(5). According to this provision, the value to be used for the calculation will be the lesser of the cost to the vendor of the acquisition, manufacture, assembly, construction or production of such goods or services and the open market value of the supply.

Proper planning and a thorough analysis of the advantages and disadvantages of deregistration should be undertaken before making a decision. Before voluntarily registering as a vendor, one should also be mindful of the future consequences of deregistration.